By Pam Martens and Russ Martens: August 10, 2023 ~
That office space company we warned our readers about so extensively in 2019, WeWork, collapsed to 13 cents a share yesterday. Its bonds were trading at about 13 cents on the dollar.
WeWork’s stock has been on a steady decline since the company began to trade publicly on October 21, 2021. The chart above shows how investors would have fared in WeWork stock versus a 10-year U.S. Treasury note since WeWork started trading in 2021.
The collapse in the share price this week came as a result of an 8-K filing with the Securities and Exchange Commission on Tuesday in which the company uttered these discomforting words: “…as a result of the Company’s losses and projected cash needs, combined with increased member churn and current liquidity levels, substantial doubt exists about the Company’s ability to continue as a going concern.”
The reason we invested so much digital ink on WeWork back in 2019 was because some very shrewd Wall Street lawyers and investment bankers were planning to dump this dog on the American people as an IPO with an insane valuation.
JPMorgan Securities LLC, a unit of five-felony-count JPMorgan Chase, and Goldman Sachs & Co. were to be the lead underwriters on the IPO. Scott Galloway, a professor at NYU’s Stern School of Business, wrote on his blog at the time that “bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors….” The deal was so dodgy that Galloway took to calling it WeWTF.
Wall Street On Parade called WeWork’s planned IPO “hype wrapped in subterfuge.” We said “It’s a money-losing commercial real estate company attempting to pass itself off as the Dalai Lama of office space rentals. The company has never made a dime of profits and its losses spiraled to $900 million in the first half of this year.”
To enhance its valuation, WeWork lamely attempted to suggest it was tied to technological breakthroughs. We explained in 2019:
“We’re also going to have to excise ‘the extensive technology infrastructure’ because what they’re really talking about is not Silicon Valley breakthrough technology but jazzing up drab offices with beer taps, microbrewed coffee, fruit-infused water and WiFi – the latter of which you can get for free in any Panera’s, along with a table and chair, for the price of a cup of herbal tea.”
In an attempt to give this lipstick-on-a-pig of an IPO added luster, WeWork was represented by a very sophisticated law firm, Skadden Arps, Slate, Meagher & Flom. The Wall Street bank underwriters were represented by another sophisticated law firm, Simpson, Thacher & Bartlett. How all of these legal eagles yawned at the conflicts of the then Chairman and CEO of WeWork, Adam Neumann, was a question worthy of the napping SEC.
As then Chairman and CEO of WeWork, Neumann owed his loyalty to the company under the past century of corporate law. But, instead, he was allowed to buy up commercial real estate on his own behalf and then lease it back to WeWork. According to the IPO prospectus, WeWork was leasing four properties from Neumann on which it owed “future undiscounted minimum lease payments” of “approximately $236.6 million….”
Neumann owned another six properties which WeWork might decide to buy from him according to the prospectus. Unfortunately, Neumann had the right to overrule the Board of Directors according to the prospectus:
“Adam [Neumann] controls a majority of the Company’s voting power, principally as a result of his beneficial ownership of our high-vote stock. Since our high-vote stock carries twenty votes per share, Adam will have the ability to control the outcome of matters submitted to the Company’s stockholders for approval, including the election of the Company’s directors. As a founder-led company, we believe that this voting structure aligns our interests in creating shareholder value.”
In 2019, Neumann was 40 years old, a former member of the Israeli military, and had previously lived in a Kibbutz. Where did he get those huge sums of money to buy up all that real estate? According to the prospectus, JPMorgan Chase Bank, UBS, and Credit Suisse gave Neumann a $500 million credit line, of which he had already tapped $380 million. In addition, JPMorgan Chase had “made loans and extended credit” to Neumann “totaling $97.5 million across a variety of lending products, including mortgages secured by personal property and unsecured credit lines and letters of credit.”
The IPO in 2019 was so heavily panned by Professor Galloway, ourselves, and numerous others that it had to be cancelled — a big embarrassment to JPMorgan, Goldman and those big name law firms. Neumann resigned as CEO shortly after the IPO was pulled. Two years later, WeWork did an end run by going public by merging with a special-purpose acquisition company (SPAC).
As of this morning, Forbes puts Neumann’s wealth at $2.2 billion. He made his wealth by selling shares in WeWork when it was still private.
Professor Galloway predicted four years ago how the end would come to WeWork. He nailed it, writing: “WeWTF is an especially risky business going into a recession, when the ability to variabilize costs is limited, but revenue decline is unlimited. WeWTF has $47 billion in long-term obligations (leases) and will do $3 billion in revenue this year. What could go wrong?”
Galloway was also ahead of his time calling WeWork a “cult.” Last year, Apple TV released a series called WeCrashed, depicting the cultish nature of the company. It starred Jared Leto as Neumann and Anne Hathaway as his wife, Rebekah. (See trailer below.)
The purpose of Wall Street is to be an efficient allocator of capital so that businesses with real prospects for innovation, job creation, and growth come to market to make America more prosperous and to keep it competitive on the global stage. Unfortunately, we find ourselves writing more and more about cults that are trading on the New York Stock Exchange. (In addition to WeWork, see here, here and here.) And, of course, there is the cult at the FTX crypto exchange which was gearing up to go public but imploded under the weight of its massive frauds instead and is now in bankruptcy proceedings. In that company, the key executives lived together in a penthouse and took billions of dollars in personal loans for themselves — money which belonged to its customers.
Something is deeply, deeply wrong with the structure of Wall Street and the watchdogs that are supposed to be policing it.